The rapid pace of technological change provides a breathtaking opportunity to challenge and change the world. We are moving toward a technology space that is swift, connected and digitized. This will not only reshape industries but also the regulatory frameworks around them.
With this in mind, regulators must reimagine how they oversee new technology and how they use it themselves, recognizing that regulatory roadblocks and inaction may create more risk rather than less. The problem is, they need to understand the technology first.
A prime example of the dilemma facing regulators arises from blockchains and stablecoins — digital tokens that are pegged to a currency like dollars or euros. This technology is uniquely mold-breaking, posing both benefits and risks, especially for those seeking to transform consumer services in finance and payments.
In financial services, blockchain businesses can benefit the financial system and its customers in powerful ways. They can accelerate financial processes, reduce friction and lower costs. Stablecoins, for example, are a medium to bypass the traditional payment infrastructure, which remains expensive and slow, especially for international payments. The related technology can also improve regulatory functions and be a tool to fight consumer data abuse, market exploitation and illicit money movements.
Some of these innovations seek to close the gap for the 1.7 billion underbanked people in the world who have no access to payments, both by reducing costs and frictions and by creating an alternative payment infrastructure in places that lack stable and reliable currency systems. Other innovators are attempting to provide access to credit for individuals who are on the outside of the financial system looking in.
At the same time, these innovations raise numerous risks that may call for regulatory action.
These include concerns about the use of consumer data, privacy, transparency, economic impact and potential abuse, such as fraud and money laundering. Lawmakers must decide how to balance and, in some cases, reshape regulation to ensure that desirable innovation can flourish, while still protecting against risk.
For six hours on Wednesday, Facebook CEO Mark Zuckerberg took questions from the House Financial Services Committee, three months after David Marcus, Facebook's cryptocurrency chief, failed in his testimony to give politicians confidence that the company would wait for a regulatory structure before launching its libra project.
Zuckerberg struggled to satisfy House members, who are concerned about regulation and the governance structure surrounding libra.
Innovation efforts surrounding cryptocurrency will require regulators to learn faster, experiment and coordinate with one another and with third-party stakeholders in new ways. And that won't be easy.
Regulators are challenged to envision how these innovations will work in practice and how novel risks can be mitigated. Stablecoins are built around technology not previously conceived. In some cases, it is not even clear what laws apply to them. The weirdness of digital coins — these mixed baskets of national currencies, debt or bonds — makes them difficult to put into a traditional category or regulatory bucket and, in some cases, even to know which standing regulatory bodies have the responsibility and authority to oversee them. Understanding their potential reach and faults is a daunting challenge for innovators and regulators alike.
Complicating matters further, many of these digital innovations are built on global platforms, underscoring the need for global coordination on the regulatory front. The U.S. Congressional Blockchain Caucus is an early example of a policy working group addressing these issues globally. We have seen recent moves by international groups like FATF, the G7 and the IMF to address concerns in a concerted manner. The G7, for example, is set to publish a report on stablecoins that provides a deeper dive into how these assets may be treated. The report [will] outline major risks posed by these digital currencies. Reports can help frame a much-needed dialogue about how the full benefits of technology can be responsibly harnessed.
G7 Stablecoin Working Group Chair Benoît Cœuré observed earlier this year that despite the rise of other national currencies, the U.S. dollar "by some measures has taken on an even greater role." What concerns regulators about Libra is that Facebook has an existing platform connected to the fabric of our global economy.
Benoît Cœuré continues: "Put differently, it is probably easier to connect a new currency to an existing network — the case of Libra — than to build a new network on an existing currency – the case of the euro."
The fact is, we are in a technological era of transformative change, and brushing these advancements aside is simply not an option. Stablecoin projects, such as Facebook's Libra, are only part of the first wave; they will not be the last. Businesses need to educate policymakers and collaborate on developing solutions and best practices that address related risks and concerns. For regulators it will take imagination to see how these innovations coexist with national currencies and monetary policies and determine the right guardrails for innovations, such as stablecoins, that can have enormous global benefits for consumers.
—Jo Ann Barefoot is CEO of the Alliance for Innovative Regulation and is a former Deputy Comptroller of the Currency. She focuses on technology and regulation issues in the U.S. and globally.